How we learn from experience and others to overcome the startup struggle
Nearly every new business owner encounters similar challenges, and many of us make the same mistakes. Long before we think of scaling up or building a business by design, we’re in startup mode—survival mode. We have a great idea and perhaps some contacts, the glimmer of a market, and some funding. But how in the world do we get the machinery running and build a business that is here to stay?
According to the U.S. Bureau of Labor Statistics, about 20% of new businesses fail within the first year. Nearly a third go under by their second year, and half within five years. While some of these failures are due to unforeseen circumstances, most early defeats stem from misfires in one of the categories covered below.
Let’s explore some of the common hurdles new entrepreneurs face and how we overcome them.
1. Failing to plan: not understanding how to position the business
Friends tell you that “your homemade cookies are great; I’d buy tons. You should start a business.” As a cookie-baker extraordinaire and someone who dislikes your current job, the idea has immense appeal. You set up an S-Corp, buy supplies, build a website, and hire a person or two. Then, you bake, start marketing, and wait. But few people buy.
Some version of this example is the prototypical story of a new entrepreneur. Many of us start this journey without applying essential business principles. As Michael E. Gerber explains in The E-Myth, a shoemaker who becomes the owner of a shoe shop often forgets a simple truism: owning a business isn’t really about the shoemaking.
Much of the early planning required to achieve success involves addressing The Five Ps of Marketing:
- Product: What are the features, benefits, and essential appeal that will entice someone to buy it?
- Price: How much should you charge? And, importantly, how does the price influence how the customer perceives the product or service?
- Placement: You’ve got great cookies, but how will they be distributed—in terms of both location and timing?
- Promotion: Getting the word out is a lot easier these days with the rise of social media and other internet vehicles. But a quality marketing plan relies on truly understanding the target market and finding practical, measurable methods to reach them.
- Positioning: This is the product fit within the market. Who is your core target, and what are their psychological, behavioral, and geographical specs that enable you to understand what they need and want? How are you different than your competition for them?
Failing to plan—or adapt plans quickly—can doom a new business
Most new entrepreneurs don’t consider each of the above factors, or only have a few of them roughly mapped out. And perhaps the main issue I’ve witnessed and experienced is failing to truly understand the market and position the product correctly. Often, we try to be everything to everyone and end up being nothing to no one. Or, as I learned with my first business, you define a target market—but it’s the wrong one!
When I started Fit2Go, my prepared meal service company, I thought that the target market was high-income executives who wanted a healthy, delicious lunch. They were busy, could afford the price point, and would love the convenience of prepared gourmet food delivered to their office. Unfortunately, I discovered that higher-income executives tend to go out for lunch.
And whereas lunch is a big deal in my home country of Venezuela, the U.S. emphasizes dinner. After a lot of trial and error, I finally found the target-market sweet spot: everyday workers craving comforting, flavorful food for lunch, along with dinner options. It took me a few years to figure all of that out. But many entrepreneurs either fail to solve their targeting problem quickly enough or roll out a product that is fundamentally incompatible with the market.
Distribution (placement) was another major challenge for me. It was a lot harder to deliver freshly made food to the entire Miami-Dade area—6,137 square miles—than I’d thought. Pricing was also a stumbling block. Because I’d assumed Fit2Go would have wealthier clientele, I had to adapt its price, and this pivot had a significant impact on cash flow and operations.
I could go on (and on) about my early planning problems—and the common mistakes that other new entrepreneurs make. But the essential misstep is this: failing to adequately research, understand, and plan the 5P marketing matrix. A great business idea will go nowhere unless we can design a product correctly, and then price, promote, and distribute it in a way that makes sense.
2. Devising the right structure and having the right people
When I started my business, I quickly enlisted family members and friends.
“I know these people. They are invested in my success. And they are inexpensive workers when every dollar counts.”
I also hired strangers who weren’t paid a lot and didn’t know much about the business. I assumed it would be easy to mold everyone into doing exactly what I thought they should do. Fit2Go didn’t really have a well-designed structure and clear accountabilities for individual roles. Everybody wound up wearing a lot of hats and had overlapping responsibilities.
These are all classic, fundamental hiring mistakes.
A well-developed, stable business has a lot more options when it comes to hiring than a startup. Significant income allows us to recruit well-paid, qualified candidates. And, by that point, we have a better understanding of who should be doing what. But while new entrepreneurs often don’t have the luxury of steady income, they should still carefully evaluate who they hire and how these roles interact.
- Clarity of structure is pivotal—understanding who you need and what each person will do. It may be all hands on deck at a startup, but directing people toward what they are good at—not merely throwing a body at what you need at the moment—is still important. Well-defined roles and responsibilities are essential.
- Another frequent stumbling block is onboarding employees who don’t align with the culture, core values, and objectives. Unfortunately, many entrepreneurs don’t even bother defining their values, culture, or goals, and thus can’t evaluate whether someone fits them. The energy the wrong people consume makes me call them organizational “terrorists.” They may be able to perform well, but if their behaviors are against what you and the company stand for, they can spoil the culture faster than you can design it.
- Finally, many of us fear the overhead of hiring better-paid and highly-qualified employees, and some of us may view them as a leadership threat.
When it comes to pay, the issue is simple: “Money is tight, and we can’t afford them. I can get this other person who seems ok—maybe not as great—for $15,000 less.” The instinct is understandable, but many experienced business owners change this mindset. First, if the candidate is aligned with the company’s vision and is exceptionally skilled and qualified for a pivotal role, they wind up saving or generating a lot more revenue than the extra wage. Second, we aren’t really committing to an annual salary. We’re committing to the first 90 days of it, which allows us to figure out if they are a great, valuable fit.
When it comes to hiring superstars, a leader’s ego can also get in the way. Some entrepreneurs assume we don’t need talented individuals for specific positions or may even feel threatened by them. When I started out, I hired people I could mold and tell what to do. It took a few years to understand the incredible value of onboarding team members who weren’t just talented, but far more capable than I am in certain ways.
Again, our options are often limited when starting a new business. Money is tight, the structure is evolving, and new entrepreneurs want to maintain a sense of control. But the lesson for both startups and established businesses is simple: we should hire the best people possible and be willing to pay a bit more for them. To borrow an aphorism, “You (and your business) are the average of the people around you.” And superstar employees increase the odds of business success dramatically.
Stay tuned for more common startup stumbling blocks
Effective planning and hiring are difficult challenges for new entrepreneurs, but there are two more that tend to make the difference between failure and success. In the next installment of The Common Hurdles Faced by New Business Owners, I discuss financing and operations. One of these is “make or break,” while the other has some room for error. In either case, we can learn from experience—and the mistakes of those who’ve already made them!
Cesar Quintero is an Entrepreneur, EOS Implementer, Why Activator, and Trainer for entrepreneurs who want to build a business by design so that they can live by design. Contact him here.